A unique opportunity now exists within the SMID cap space for investors looking to diversify their portfolios and gain access to a previously difficult-to-invest-in strategy. The KraneShares Man Buyout Beta Index ETF (BUYO ) offers the benefits of an ETF while applying a private equity strategy to public companies.
“BUYO offers investors a unique way to access companies with characteristics that private equity firms find attractive, but with the liquidity and transparency of an ETF,” Kevin Orr, Managing Director and Head of Strategic Partnerships at KraneShares, said in a recent press release.
BUYO launched earlier this month and seeks to capture the small- and midcap companies that demonstrate similar return drives as those within private equity (PE)/buyout funds. These stocks are sourced from the Russell 2500 and systematically selected for inclusion in the Man Buyout Beta Index. The Russell 2500 carries a high correlation (75.3% on a historical basis since 2008) to the Preqin Private Equity ex-Venture Capital Index, according to KraneShares.
Delving Into BUYO's Private Equity Strategy
The strategy targets those industries that PE funds generally gravitate to. These include the information technology, industrials, health care, and consumer discretionary sector. Through its focus on metrics like free cash flow yield, elevated operating margins, lower CapEx, and top-line growth, the strategy may offer higher correlations and returns consistent with buyout funds on a long-term basis.
“We developed the approach underlying the Man Buyout Beta Index to provide an opportunity to harness the key return drivers powering PE funds,” explained John Lidington, co-PM covering liquid private equity at Man Numeric. Man Numeric is the sub-advisor for BUYO. “The approach helps identify potentially undervalued companies that in many cases may become public to private takeout targets in the future.”
Lidington noted that such strategies were previously cost-prohibitive with high barriers to entry for most investors. Bringing the strategy over to public equities and bundling it within the ETF wrapper provides ease of access and transparency.
BUYO may appeal to a range of investors, such as institutional investors seeking exposure to the buyout asset class while waiting to gain entry to PE funds. “It may also be attractive to investors seeking highly correlated liquid alternative exposure to the PE market,” Jonathan Shelon, COO of KraneShares, said. The fund may also appeal to “investors looking to diversify their portfolios by implementing a more endowment-like asset allocation that includes a healthy weighting to PE-like strategies.”
BUYO carries an expense ratio of 0.89%.
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